Blog

How to tie compensation to performance reviews: Part I

Many conversations I have to revolve around whether to tie performance evaluations to compensation.

Tiny question. But holy smokes, what a big deal.

The question I typically fire back goes something along the lines of “Well what are you hoping to achieve out of this process?”. To which, I hear something to the tune of:

a) “I don’t know, people want raises right?”

b) “We need to justify allocations of salary/bonus amounts to the board”

c) “My Director said we need to do it.”

The one sentiment I rarely, if ever, hear is:

“We have some massive milestones to hit in the next 2 years. That means we need to elevate the performance of our people.”

Hold the phone. Did someone say “performance of our people”? As an outcome of a performance evaluation?!

In my dream scenario, this is the part where they then they go on to say…

“…we know that motivating performance is far bigger than compensation processes alone. Other factors drive intrinsic motivation. We know that compensation is an important part of our broader performance ecosystem. It rewards the right behaviors and aligning outcomes”

What’s the big deal?

As a performance management company, we’ve come across lots of performance evaluation processes. And the number one theme we find is this: The purpose of your performance evaluation and compensation process are often misunderstood.

Why? Because often performance management processes are in place to serve the needs of the business. Yes, we get it. The business needs data. To make some decisions. At the expense of actually inspiring future performance yet? Where did we lose our way?

Let me elaborate.

As a company, you’re investing effort in a process that is disengaging your workforce. It’s not designed to enhance your people’s future performance nor improving your ROI. Not intentional most likely, but man is it backfiring.

What matters then?

Anyone who has listened to one of our 7Geese webinars on the subject will know how important it is. The notion of “perceived fairness” comes down to evaluating future performance from a review process.

In fact, every piece of evidence we have and know about performance appraisals indicate it is one of the only things that matter in the end (with “the end” meaning “driving future performance” = the whole point of this concept we call “performance management”).

The point is this start with IMPROVED PERFORMANCE as your end goal. Chances are if you keep this goal in mind, the process will be perceived more fairly and drive your end goal. And guess what? A by-product of this will be the ability to allocate and justify your salary funds more effectively, efficiently and yield that holy grail of ROI that we’re all madly striving for.

Let’s circle back to the original question.

Should we link performance reviews to compensation?

If you truly want to stretch your people and IMPROVED performance is your end goal, you need to incorporate regular development-focused reviews into your overall Performance Management strategy. These development focussed reviews should be solely based on robust and honest feedback that is NOT directly linked to compensation outcomes.

This is important when it comes to using a methodology like OKRs. Linking OKRs to compensation often leads to goals that have no stretch or ambition. Which is the whole point of using them, to begin with?

Of course, many companies still need to link performance with compensation (and certainly, this will also drive behavior). My advice here is this, when linking your evaluations with compensation don’t limit your variables to KPIs. You must also reward the right behaviors based on true indicators of success.

At 7Geese we are big believers in starting with defining what “success” actually means. Within any given company, role, or time, building your process around this as your starting point and rewarding the associated behaviors that go with it.

Kicking off with success profiling is a great foundation for implementing compensation-based evaluations as they create a stronger set of guidelines that take into account the necessary motivations, skills, behaviors, knowledge & experiences that define success beyond KPIs alone and are specific to your company culture.

Using these, you can work toward a more fair and transparent employee experience as well as ensure you are incentivizing culturally aligned behaviors. It’s a project I am implementing in-house at 7Geese and I’m happy to share our experiences so far with you.

Libby is an Organisational Development and Talent Management Specialist with a background in business psychology and over 5 years' experience facilitating positive behavioural change, enabling individuals, teams, and organizations to realize their potential.